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\author{131 Undergraduate Public Economics \\ Emmanuel Saez \\ UC Berkeley}
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\title{Introduction \\ (Chapter 1, Gruber textbook)} \onlyslides{1-300}
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{\bf PUBLIC ECONOMICS DEFINITION}
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Public Economics (or public finance) = Study
of the Role of the Government in the Economy
Government is instrumental in most aspects of economic life:
1) Government in charge of huge \textbf{regulatory} structure
2) \textbf{Taxes:} governments in advanced economies collect 35-50\% of National Income in taxes
3) \textbf{Expenditures:} tax revenue funds \textbf{traditional public goods} (infrastructure, public order and safety, defense)
and \textbf{welfare state} (Education, Retirement benefits, Health care, Income Support)
4) Macro-economic \textbf{stabilization} through central bank (interest rate, inflation control), fiscal stimulus, bailout policies
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%{\bf Why Study Public Finance?}
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%Controversies about the proper role of the government raise the fundamental questions addressed by the branch of economics known as \emph{public finance} or \emph{public economics}.
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%The goal of public finance is to \emph{understand the proper role of the government in the economy}.
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%1.1 The Four Questions of Public Finance
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{\bf Four questions of public finance}
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1) When should the government intervene in the economy?
2) How might the government intervene?
3) What is the effect of those interventions on economic outcomes?
4) Why do governments choose to intervene in the way that they do?
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{\bf When should the government intervene\\ in the economy?}
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{\bf 1) Market Failures}: Market economy sometimes fails to deliver an outcome that is efficient
$\Rightarrow$ Government intervention may improve the situation
{\bf 2) Redistribution}: Market economy generates substantial inequality in economic resources
across individuals $\Rightarrow$ People willing to pool their resources (through government taxes and transfers)
to help reduce inequality
First part of the class focuses on Redistribution
Second part of the class focuses on Market Failures
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{\bf Main Market Failures}
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\textbf{1) Externalities:} (example: greenhouse carbon emissions) $\Rightarrow$ require
govt interventions (Pigouvian taxes/subsidies, public good
provision)
\textbf{2) Imperfect competition:} (example: monopoly) $\Rightarrow$ requires
regulation (typically studied in Industrial Organization)
\textbf{3) Imperfect or Asymmetric Information:} (example: adverse
selection in health insurance may require mandatory
insurance)
\textbf{4) Individual failures:} People are not always rational. This is analyzed
in behavioral economics, field in huge expansion (example:
myopic people may not save enough for retirement)
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{\bf Inequality and Redistribution}
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Even if market outcome is efficient, society might not be
happy with the market outcome because market equilibrium
might generate very high economic disparity across individuals
Governments use taxes and transfers to redistribute
from rich to poor and reduce inequality
Redistribution through taxes and transfers might reduce
incentives to work (\textbf{efficiency costs})
$\Rightarrow$
Redistribution creates an \textbf{equity-efficiency trade-off}
Income inequality has soared in the
United States in recent decades, and has moved to the forefront
in the public debate (Piketty's 2014 book success, stats from Piketty-Saez-Zucman '16)
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{\bf How Might the Government Intervene?}
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{\bf 1) Tax or Subsidize Private Sale or Purchase:} Tax goods that are overproduced (e.g. carbon tax) and subsidized
goods underproduced (e.g., flu shots subsidies)
{\bf 2) Restrict or Mandate Private Sale or Purchase:}
Restrict the private sale or purchase of overproduced goods (e.g. fuel efficiency requirements), or mandate the private purchase of underproduced goods (e.g., auto insurance)
{\bf 3) Public Provision:}
The government can provide the good directly, in order to potentially attain the level of consumption that maximizes social welfare (example is National Defense)
{\bf 4) Public Financing of Private Provision:}
Government pays for the good but private sector supplies it (e.g., privately provided health insurance paid for by US government in Medicare-Medicaid)
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{\bf What Are the Effects of Alternative Interventions?}
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{\bf 1) Direct Effects:} The effects of government interventions that would be predicted if individuals did not change their behavior in response to the interventions.
Direct effects are relatively easy to compute
{\bf 2) Indirect Effects:} The effects of government interventions that arise only because individuals change their behavior in
response to the interventions (sometimes called \textbf{unintended effects})
Empirical public economics analysis tries to estimate indirect effects to inform the policy debate
\textbf{Example:} increasing top income tax rates mechanically raises tax revenue but top earners might work less
and earn less, reducing tax revenue relative to mechanical calculation
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{\bf Why Do Governments Do What They Do?}
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{\bf Political economy}:
The theory of how the political process produces decisions that affect individuals and the economy
\textbf{Example:} Understanding how the level of taxes and spending is set through voting and voters'
preferences
\textbf{Public choice} is a sub-field of political economy from a Libertarian perspective that focuses on \textbf{government
failures}
government failures = situations where the government does not act in the benefit of society
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{\bf Normative vs. Positive Public Economics}
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{\bf Normative Public Economics:} Analysis of How Things Should be
(e.g., should the government intervene in health insurance market?
how high should taxes be?, etc.)
{\bf Positive Public Economics:} Analysis of How Things Really Are
(e.g., Does govt provided health care crowd out private health
care insurance? Do higher taxes reduce labor supply?)
Positive Public Economics is a required 1st step before we can
complete Normative Public Economics
Positive analysis is primarily empirical and Normative analysis is
primarily theoretical
%Positive Public Economics overlaps with Labor Economics
%{\bf Political Economy} is a positive analysis of govt outcomes
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{\bf Paternalism vs. Individual Failures}
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In many situations, individuals may not or do not seem to act in
their best interests [e.g., many individuals are not able to save
for retirement]
Two Polar Views on such situations:
1) {\bf Paternalism [Libertarian View]} Individual
failures do not exist and government wants to impose its
own preferences against individuals' will
2) {\bf Individual Failures [Behavioral Economics View]}
Individual Failures exist: Self-control problems, Cognitive
Limitations
Distinguishing the 2 views: Under Paternalism,
individuals are opposed to government interventions. If individuals understand they have failures, they will
support govt interventions.
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{\bf Key Facts on Taxes and Spending}
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\textbf{1) Government Growth:} Size of government relative to National Income grows dramatically
over the process of development from less than 10\% in less developed economies to 30-50\% in most
advanced economies
\textbf{2) Government Size Stable} in richest countries after 1980
\textbf{3) Government Growth} is due to the expansion of the \textbf{welfare state:} (a) public education, (b) public retirement benefits, (c) public health insurance, (d) income support programs
\textbf{4) Govt spending $>$ Taxes:} Most rich countries run deficits and have significant public debt (relative to GDP),
particularly after Great Recession of 2008
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{\bf DIFFERENT LEVELS OF GOVERNMENTS}
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US Federal govt raises about 20\% of National Income in taxes
State+Local govts raise about 10\% of Nat. Income in taxes
Decentralized states = states where a larger fraction of taxes/spending take place at local level
Decentralized states give additional power to individuals who can also vote with their feet
Creates competition between local govts: If local govt is inefficient (high taxes and wasteful spending), residents can leave, putting the local govt out of business
Redistribution through taxes and transfers harder to achieve at local level (rich can leave if local taxes are too high)
$\Rightarrow$ Conservatives/libertarians tend to prefer decentralized states
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%{\bf DISTRIBUTION OF SPENDING}
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%{\bf Public goods}:
%Goods for which the investment of any one individual benefits everyone in a larger group
%(examples: defense, police, roads).
%
%{\bf Social spending programs}:
%Government provision of insurance against adverse events to correct inequality and
%address failures in the private insurance market (examples: education, retirement benefits, public health insurance,
%unemployment insurance, disability insurance)
%
%Growth in government since 1900 mostly due to expansion of social spending: public education, public health benefits,
%retirement benefits, and income support programs
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{\bf DISTRIBUTION OF TAXES}
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US Federal govt raises about 20\% of GDP in taxes, State+Local govt raises about 10\% of GDP in taxes.
Main Federal taxes: (1) Individual income tax (40\%), (2) payroll taxes on earnings (40\%), (3) corporate tax
(15\%)
Main State taxes: (1) real estate property taxes (30\%), (2) sales and excise taxes (30\%), (3) individual and corporate state taxes (30\%)
Key questions: who bears the burden of those taxes (tax incidence), what impact do they have on the economy?
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{\bf REGULATORY ROLE OF THE GOVERNMENT}
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Another critical role the government plays in all nations is that of \emph{regulating economic and social activities}.
Examples:
1) \textbf{Minimum wage} at the Federal level is \$7.25 (States can adopt higher min wages) $\Rightarrow$
Potential impact on inequality
2) The \textbf{Food and Drug Administration (FDA)} regulates the labeling and safety of nearly all food products
and approves drugs and medical devices to be sold to the public
3) The \textbf{Occupational Safety and Health Administration (OSHA)} is charged with regulating the workplace safety of
American workers
%-The \textbf{Federal Communications Commission (FCC)} regulates interstate and international communications by radio, television, wire, satellite, and cable.\\
4) The \textbf{Environmental Protection Agency (EPA)} is charged with minimizing dangerous pollutants in the air, water, and food supplies
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{\bf PUBLIC DEBATES OVER SOCIAL SECURITY, HEALTH CARE AND EDUCATION}
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Taxes, health care, and climate change are each the subject of debate, with both the ``liberal" and ``conservative" positions holding differing views in their approach to each problem.
{\bf Taxes:}
Obama's administration increased taxes on top earners significantly in 2013 (repeal of Bush tax cuts + Obamacare taxes). New Trump administration wants to reverse these changes and more.
%
%{\bf Social Security:}
%Social Security is the single largest government expenditure program. The financing structure of this program is basically that today's young workers pay the retirement benefits of today's old.
{\bf Health Care:}
Up to 2013, about 20\% of the non-elderly U.S. population did not have health insurance
Obamacare cut this number down to 10\% but might be repealed
{\bf Climate change:} Carbon emissions are generating global warming with potentially
huge negative consequences in the future (sea rise, extreme weather, agricultural output).
Debate on costs of global warming. What should govt do?
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%{\bf CONCLUSION}
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%
%It is clear from the facts presented here that the government plays a central role in the lives of all Americans.
%
%It is also clear that there is ongoing disagreement about whether that role should expand, stay the same, or contract.
%
%The facts and arguments raised in this chapter provide a backdrop for thinking about the set of public finance issues that we explore in the remainder of the lectures.
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{\bf PROFESSOR SAEZ' RESEARCH}
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Most of my research (available on my webpage) is in public economics:
1) Design of optimal tax policies and optimal transfer programs (theory, normative)
2) Analysis of the effects of taxes and transfers on individual behavior (empirical, positive)
3) Analysis of inequality overtime and across countries (empirical, descriptive)
I will discuss some of my research in this course when we cover the relevant topics
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{\bf REFERENCES}
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{\small
Jonathan Gruber, Public Finance and Public Policy, Fifth Edition, 2016 Worth Publishers, Chapter 1
%Kleven, Henrik, Claus Kreiner, and Emmanuel Saez ``Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries'', NBER Working Paper No. 15218, August 2009 \href{http://www.nber.org/papers/w15218.pdf}{(web)}
National Center for Education Statistics ``Highlights from TIMSS 2007: Mathematics and science achievement of US fourth-and eighth-grade students in an international context.'' Institute of Education Sciences, US Department of Education, 2009.\href{http://elsa.berkeley.edu/~saez/course131/TIMSS07.pdf}{(web)}
Piketty, Thomas, \emph{Capital in the 21st Century}, Cambridge: Harvard University Press, 2014, Chapter 13,
\href{http://piketty.pse.ens.fr/en/capital21c2}{(web)}
Piketty, Thomas and Emmanuel Saez ``Income Inequality in the United States, 1913-1998'', Quarterly Journal of Economics, 118(1), 2003, 1-39, series updated to 2012 in September 2013 \href{http://www.jstor.org/stable/pdfplus/25053897.pdf}{(web)}
Piketty, Thomas, Emmanuel Saez, and Gabriel Zucman, ``Distributional National Accounts:
Methods and Estimates for the United States'', NBER Working Paper No. 22945, 2016.
\href{http://www.nber.org/papers/w22945.pdf} {(web)}
}
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